Season 9: From Experiment to Organization
The goal of the Optimism Foundation has always been to establish an organization that can support the “world supercomputer” into perpetuity. After nearly four years of experimentation — and countless conversations with users, customers, academics, politicians, and other experts — we now understand that this organization can’t look like the typical DAO or the traditional corporation.
Relative to the organizations that came before us, the core value propositions that Optimism governance delivers are:
Reduced platform risk for users of the OP Stack, via governance of the protocol
Platform risk is the risk to a business or user that a platform they depend on changes against their interests. It is a common risk of Web 2 platforms and is a key consideration for the largest partners building on the OP Stack. See here to read more about how Optimism governance reduces this risk.
Prevention of short-term profit seeking at the expense of the platform’s long-term viability, via governance of the treasury
We call this risk “enshittification” and it is one of the failure modes of traditional corporate governance. See more below about our plan to reduce this risk via Optimism governance below.
Over the past year, we introduced a refined process for governing the OP Stack (Protocol Upgrades 2.0) aimed at reducing platform risk. Over the next six months, we’ll gradually introduce an updated process for governing the treasury (Capital Allocation 2.0) to prevent short term extraction at the cost of long term innovation. While these differences may seem simple, they allow Optimism to build a meaningfully different business.
DeFi evolved to emulate many of the characteristics of the traditional financial system with one important difference: Transparency.
Organizations that support protocols will similarly evolve to emulate many of the characteristics of the tradition corporate governance system with one important difference: Accountability.
By June, we expect to reach the milestone we set out nearly four years ago to achieve: the initial spec of a new type of organization - not a DAO and not a corporation - but something new ✨
Where Corporate Governance Fails
It’s no secret that most DAOs struggle with capital allocation. While Optimism has avoided some of the worst failure modes, the current process still doesn’t adequately serve the needs of the Superchain.
If we instead look to the traditional corporate governance as a more appropriate model for inspiration, it too fails in important ways. The base case corporate governance model creates two key failure modes we want to avoid:
Short-term optimization that leads to long-term degradation of the platform (enshittification)
In traditional companies, requirements to “maximize shareholder value,” short sighted incentives, and governance control by only the largest financial interests lead to a series of short-term decisions that may temporarily pump the price, but that may also jeopardize the long term sustainability and value of the business.
Naturally, tension arises when deciding what should be done with profits. Financial interests tend to push to use profits to pay out investors, which can starve re-investment in the business, resulting in a worse product over time. In extreme cases, over-extraction can result in underinvestment in mission critical security measures, which can cause existential risk.
Disagreements over these decisions can result in costly proxy fights to control seats on the board of directors, a potentially suboptimal and extreme outcome generally used as a last resort. That can prevent change from occurring until underperformance reaches undesirable levels.
Avoiding these dynamics has always been core to Optimism’s design, evidenced by the incorporation of OP Labs as a Public Benefit Corporation and the inclusion of non-financial interests in voting since day one (See Stakeholder Voting.) Capital Allocation 2.0 will introduce additional measures aimed at preventing this failure mode.
The Board as a single point of failure in holding management accountable
The board of directors, as the primary accountability mechanism for public companies, was cited as a significant source of failure of corporate governance in many of our expert interviews (i.e. failing to hold management accountable). Capital Allocation 2.0 will introduce additional accountability mechanisms to ensure management “can’t be evil.”
Capital Allocation 2.0
Over the next ~6 months, the Foundation plans to address the above failure modes, and work towards delivering the unique value propositions of Optimism governance, by putting forward proposals to:
Restructure how capital is allocated to more effectively invest in the Superchain
Enhance the OP token’s role in the Superchain
Add mechanisms to hold OP Labs accountable, including:
A legal structure (possibly a DUNA) to allow more voting power to come online and to transfer specific assets and governance powers to the structure onchain
A final set of proposal types outlined in the Operating Manual
All Foundation proposals are subject to governance approval.
How we Invest in the Business
Over the past three years, Optimism has experimented with ways to organize, fund, and align our efforts to build and grow the Superchain. We’ve run experiments evaluating the following:
Community-led capital allocation aimed at fueling user growth, supporting developer adoption, and winning customers.
Community contributions via Mission Requests and a public core development process.
Public goods funding aimed at discovering how Optimism might accurately fund positive impact to support a growing ecosystem.
What we've learned is that attempting to coordinate a disparate set of teams and organizations results in loss of shared context and less efficient operating structures, and also does not meaningfully increase decentralization where it matters.
This is especially true for an organization at Optimism’s stage in development, which has early product-market fit but must ruthlessly prioritize in order to scale and become profitable.
Over the next few months, the Foundation will propose updates to allow the Collective to sustainably fund OP Labs, while governance ensures accountability for the achievement of goals and targets via a set of veto rights over capital allocation.
All Foundation proposals are subject to governance approval.
As in a public company, the primary role of governance will be holding OP Labs accountable to effective and sustained progress. Unlike the original vision of DAOs, the role of governance will not be to empower voters to actively drive this progress themselves - via capital allocations or open contributions - but rather to ensure those entrusted with this responsibility (OP Labs) perform well.
By allowing voters to veto specific allocation decisions, course correction can occur faster and with lower stakes relative to the corporate governance base case.
How We Fund Public Goods
Over the past several years, Retroactive Public Goods Funding has been one of the Collective’s most ambitious experiments in grant making, distributing OP to a wide range of open-source builders, researchers, educators, and contributors as a way to strengthen the Optimism ecosystem. The program generated valuable learnings about retroactive incentives, ecosystem-scale public goods funding, and community-led capital allocation, all of which have meaningfully informed Optimism’s evolution.
As Optimism enters a new phase focused on execution, scale, and enterprise adoption, the Retro Funding program will be paused to reevaluate how it fits into Optimism’s long term strategy. Public goods remain core to Optimism's vision. This decision reflects the near term need to focus on the core public good Optimism provides in developing and maintaining the OP Stack.
The Retro Funding program will not run for at least the next 12 months. In the meantime, the Foundation will assess alternative approaches to support public goods. A proposal to re-allocate all or a portion of the tokens reserved for Retro Funding (~775M OP) may be put forward by the Foundation in the coming months.
How the OP Token Shares in the Superchain's Success
The Optimism Foundation has put forward a proposal to transition OP from a pure governance token to a token that is tightly aligned with the growth of the Superchain. The Foundation’s proposal introduces a buyback mechanism using 50% of incoming Superchain revenue to buy the OP token for the next 12 months. Every transaction across every OP Chain expands the base from which buybacks operate. The more blockspace consumed across the Superchain, the more structural demand flows into OP.
The OP token will still retain important governance rights, but now Superchain activity will also strengthen the underlying demand for the token. This is the first step in establishing healthy tokenomics for the OP token, which plays an important role in capital allocation.
See the full proposal here.
All Foundation proposals are subject to governance approval
How OP Labs is Held Accountable by Stakeholders
As more discretion over the treasury is transferred to the Optimism Foundation and OP Labs, holding these entities accountable becomes that much more important for the long term sustainability of the business. In addition to existing governance rights (which include removal of Foundation Directors), the Foundation plans to ensure these entities ultimately remain accountable to governance by putting forward proposals to:
Establish a legal structure (possibly a DUNA) to allow more voting power to come online and to transfer specific assets and governance powers to the structure with onchain controls.
Finalize the set of proposal types outlined in the Operating Manual and transition the Working Constitution to a Bedrock Constitution on the original four year timeline. This will include oversight over capital allocation, a key difference to the corporation governance base case in which shareholders typically don’t have direct oversight over most capital allocation decisions.
Relative to offchain governance, onchain governance can provide unique properties that enhance accountability. Rather than optimize the existing board structure, additional onchain functionality will ensure management works in the interest of all stakeholders.
All Foundation proposals are subject to governance approval.
Towards a Bedrock Constitution ✨
We are excited to evolve from the experimental stage towards the establishment of a new type of organization that aims to avoid common failure modes of both web 2 and web 3. Over the next few months, this initial design will be solidified on the Foundation’s original four-year timeline, transitioning the Working Constitution to a Bedrock Constitution. The Foundation - with governance oversight - will continue to monitor, refine, and update the design to ensure the Collective continuously adapts, innovates, and evolves over time.
For more details about Season 9, see Guide to Season 9.